LL Surplus Lines Series (Entry 16): Expert Analysis – Disability Insurance in the Surplus Lines Market and Recent Legislative Updates

The Surplus lines market has traditionally been a method for insurance placement available to property and casualty products only, although states are increasingly opening up other lines of insurance to the nonadmitted market.  For example, a growing number of states have either expressly or indirectly allowed for accident and health coverage to be written through the surplus lines market, and the National Association of Insurance Commissioners released guidance earlier this year advising the states on how to effectively legislate for the expansion of insurance lines that may be written on a surplus lines basis.

One line of insurance that sometimes falls into a “grey” area is disability coverage.  Only a handful of states have expressly addressed whether disability insurance may be written through the surplus lines market.  For example, Colorado allows for disability exportation, as the definition of “surplus lines insurance” under Colo. Rev. Stat. § 10-5-101.2 “[i]ncludes disability insurance.” Some states allow limited forms of disability coverage by virtue of inclusion on their export lists; for example, California’s export list allows for “high limits disability” which is defined as “coverage that offers benefit amounts over the admitted market maximum issue and participation limits and/or includes occupations which are not eligible through the admitted markets” to be exported to the nonadmitted market.  By contrast, in Maine, pursuant to Bulletin 414 (June 16, 2016), “health insurance (including disability insurance) . . . may not go into surplus lines.”   (Emphasis added).

Maine’s position highlights the true ambiguity facing the surplus lines market: what is “disability” insurance anyway?  While many states expressly prohibit health and accident coverage from being written on a surplus lines basis or otherwise define “surplus lines” insurance to include property and casualty coverage only, many states have not done an effective job at providing whether disability insurance will be considered a subset of accident and health insurance for purposes of the surplus lines prohibition.  For example, North Dakota is a state that only allows for property and casualty insurance to be written by a surplus lines insurer, and defines “accident and health” insurance under N.D. Cent. Code § 26.1-26-11 as “insurance coverage for sickness, disease, injury, accidental death, and disability.”  (Emphasis added).  But did North Dakota really intend to exclude, for example, forms of high limit disability products expressly allowed in California that are increasingly served by the nonadmitted market?

Recently, we have seen some states begin to confront this ambiguity.  For example, Rhode Island amended R.I. Gen. Laws § 27-3-38.3 such that, notwithstanding the prohibition of writing life, accident and health insurance through the surplus lines market, “[a]n exception is hereby made to this prohibition for the procurement of disability insurance with a benefit limit in excess of a benefit limit available from an admitted insurer. For that class of business only, a broker may obtain insurance from the surplus market.”  As Rhode Island had not previously defined “health and accident” coverage for purposes of surplus lines applicability, it was one of numerous states that, up until July, had not effectively provided guidance in this regard.

The surplus lines marketplace already services disability demands across the nation and, yet, varying levels of regulatory risk persist in states that have not issued clear guidance on its permissibility.  We will continue to report on any updates and clarifications from the states on this matter.

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